Financial Analysis

Food Cost versus Contribution Margin

Food Cost measures the cost ingredients as a percentage of the selling price of the dish. It is a great system to help monitor the efficiency of a kitchen but not necessarily the best for developing a profitable menu. To calculate the food cost of an item, divide the cost of the item by its selling price to get the food cost percentage:

The above example illustrates costing on one item. In order to calculate the food cost for an entire menu and use it effectively as a tool for monitoring efficiency, inventories are necessary – usually weekly or monthly. This process involves an Opening Inventory, adding Purchases, less a Closing Inventory. The derived number is the Usage, measured in dollars. Dividing the total Usage by the Total Sales will produce the Actual Food Cost.

In order for food costing to be an effective tool, you need to measure the Actual Food Cost against the Theoretical Food Cost. The difference between the two numbers is your inefficiency (poor product rotation, returns, theft and over portioning). Calculating Theoretical Food Costs requires a product sales mix – a listing of quantity sold, by menu item, for the given period. You already know the Theoretical Cost of each item (what it should cost), but because different items have different costs, the overall menu cost will change day-to-day based on different items sold, or menu mix.

In the example below, the total cost of the menu (assuming there were only 3 items) was $94.00. If the total sales for the week were $300.00, the Theoretical Menu Cost for that week would be 31.3%.

Week Ending: February 20, 2005

ITEM	COST	QTY SOLD	TOTAL
Steak Sandwich	$6.45	5	$32.27
8 oz Sirloin	$9.76	4	$39.02
10 oz New York	$11.36	2	$22.71
TOTAL			$94.00

Subtracting the Actual Food Cost from the Theoretical Food Cost will provide the amount of Waste (inefficiency) for the period in a percentage. If you multiply that by the sales, you will know how many dollars were wasted for that period. This system is great to zero in on problem areas in the kitchen and help ensure that the planned cost of the item is the real cost.

Contribution Margin, on the other hand, is the amount of dollars a particular item contributes to the bottom line profitability of a restaurant. Since the restaurant is in business to bank dollars, not food cost percentages, this is a more logical method to build a profitable menu. To calculate the contribution of an item, simply subtract the Item Cost from the Selling Price. This will produce the profit every time this item is sold.

The following example compares the two methods on a typical menu decision. The next time you believe that the beef you are buying is too expensive, or that upgrading the quality is not financially feasible, work through this exercise. Guests will pay more for beef on a menu over other proteins as it is perceived to be of higher value. The ceiling price for a chicken sandwich, in this example, is considerably lower.

7 oz Steak Sandwich		6 oz Chicken Sandwich
Cost of Plate	$3.40	Cost of Plate	$2.27
Selling Price	$9.50	Selling Price	$7.50
Food Cost	35.7%	Food Cost	28.5%
Contribution	$6.10	Contribution	$5.23
Sell 50 steaks, the gross profit is $305.00		Sell 50 chicken, the gross profit is $261.50
The gross profit on the steak was $43.50 more for the same amount of labour.

View Food Cost versus Contribution Margin Sheet (PDF)

Yield Analysis

Calculating the yield of portioned beef will give a realistic comparison of whole muscle versus pre-portioned product. Just because the price per pound is usually lower on whole muscle cuts, the useable product derived from steaking in-house may not turn out to be more profitable. On the other hand, at certain times of the year and with specific cuts, whole muscle may be better financially.

Understanding yield and being able to work through a yield test has several advantages:

• It allows you accurately compare product from different suppliers in terms of actual cost
• It helps you better appreciate the real costs (portion cost) of your products
• Not all operations are suited for in-house portioning. Ensure that you consider the many variables outlined in the Handling & Cutting section.

First, determine your costs and identify the items being tested. Identify all first and secondary portion cuts, any bone, trim and fat and record their weights. Calculate the weight percentages of all items and record them. How many people are being fed? What is the price paid for your beef? What is the serving size? Remember that this is a very simple yield test and you are encouraged to spend some time learning the Financial Tools for the Meat Professional, which follows.

View a blank Simple Yield Test form (PDF)

Foodservice Financial Tools

The Foodservice Financial Tools are designed for operators who are serious about understanding the financial performance of beef on their menu. The use of this program requires Microsoft Excel to be installed on your computer – please follow the instructions below to use.

Optimize Purchasing

Appropriate selection and purchasing of raw materials is an important first step. The Yield Test Spreadsheet includes the ability to:

• Measure the yield and production costs of food service items produced from the starting meat block
• Determine the costs of portioning meat products in-house versus purchasing pre-portioned items
• Calculate the quantity of raw materials which must be obtained to produce a specific number of portions

Develop Preparation Methods

The quality of meat products is significantly impacted by preparation methods. Use the yield test spreadsheet to:

• Document cooking methods and measure their impact on yield
• Determine the cost of shrink resulting from portioning and cooking operations
• Summarize meat costs for raw, cooked and portioned product

The Yield Test Spreadsheet enables the user to track yields as well as associated costs and revenues from beef, veal and other common meat and poultry products. The Compare Yield Test Spreadsheet permits up to five yield tests to be compared simultaneously. The financial tools include printable forms to make yield test data capture easier and more accurate. Reports can also be produced to document yield test findings and comparisons.

Build Your Plate

At foodservice, the meat comes on a plate. The yield test spreadsheet helps you put it all together:

• Track the costs associated with combining meat items with other foods from a user database
• Calculate food and contribution margins for your menu items

Compare Your Options

Sometimes the best way to make a financial decision is to make comparisons:

• Compare yields from meat blocks with different starting specifications
• Evaluate meat products from several suppliers
• Track your operation’s efficiency by comparing information over time
• Analyse the profitability of up to five menu items simultaneously